The most reliable warning signal in the US stock market has lit up! After flashing twice in history, both times were followed by a major bear market

A key indicator that has tracked the U.S. stock market for nearly 70 years is now issuing a rare warning signal.

The "Quality Minus Junk factor" (QMJ), which measures the relative performance of quality stocks versus junk stocks, abruptly reversed in July this year after the longest and deepest junk stock bull run in history— and every similar reversal in history has signaled the onset of a major bear market.

In July this year, the QMJ posted the largest single-month gain since records began in 1957, reaching 14.3%. Meanwhile, Goldman Sachs' basket of loss-making technology stocks fell 11% in the third quarter, while high-quality consumer stocks like Procter & Gamble and Coca-Cola staged a strong rebound. F. Porter Stansberry, founder of investment research firm Porter and Company, warned, this signal means "now is the time to be cautious."

Historical data shows that the second and third largest single-month surges of the QMJ occurred in November 2000 and October 2008—both right before two major bear markets. The current junk stock bubble, fueled by the artificial intelligence boom, is the largest ever recorded in nearly 70 years of AQR data, and its bursting could have a significant market impact.

The Largest Junk Stock Bubble in History: Three-Year Run Powered by AI Mania

This current cycle of junk stocks outperforming quality stocks began in November 2023 and continued through June 2026, setting records for both duration and magnitude.

During this period, a portfolio that was long the highest-quality U.S. companies and short the lowest-quality companies accumulated a loss of 36%—the worst performance for the QMJ factor since records began in 1957. The 12 months ending May 2026 marked the worst 12-month period for quality stocks in the entire 69-year record. Quality stocks posted losses for three consecutive years in 2023, 2024, and 2025, and fell another 3.8% in the first eight months of 2026.

The core driver of this phenomenon is investors' fervent pursuit of artificial intelligence technology. According to Bloomberg data, Goldman's basket of loss-making tech stocks surged 57% in the first five months of 2026, while the S&P 500 rose only 11% in the same period. For example, the Russell 2000 index, where more than a quarter of its constituents are loss-making small caps, gained 22.7% in the first half of this year, more than double the gain of large caps.

Stansberry defined this as a "tech-driven junk stock bubble," pointing out that it is the largest such bubble ever recorded.

QMJ Factor: A 69-Year Barometer Tracking Market Rationality

To understand this warning signal, it's necessary to first grasp the construction logic and historical background of the QMJ factor.

The QMJ factor was proposed by AQR Capital Management founder Cliff Asness along with Andrea Frazzini and Lasse Heje Pedersen in 2013, and the related paper was published in the Review of Accounting Studies in 2019. Asness was mentored by Nobel Prize-winning economist Eugene Fama, whose research demonstrated that markets are mostly able to efficiently price assets.

The QMJ factor defines "quality" as three characteristics investors should pay a premium for: profitability, growth, and safety. Profitability is measured through six different metrics; growth tracks the change in earnings per share over the past five years; safety incorporates a stock’s volatility relative to the S&P 500 (beta), Ohlson O-Score and Altman Z-Score for balance sheet robustness, and the volatility of return on equity over the past five years.

Each month, the factor scores and ranks all U.S. listed stocks, going long the top 30% (quality stocks) and short the bottom 30% (junk stocks), weighted by market cap and rebalanced monthly. AQR provides U.S. data back to July 1957. Notably, the QMJ factor does not consider valuation, only quality.

Over the long term, from July 1957 to August 2026, quality stocks outperformed junk stocks by 3.6% per year, proving that the market systematically underestimates quality.

Historical Pattern: After Junk Stock Bubbles Burst, Bear Markets Often Follow

AQR’s historical data reveals a clear pattern: cycles where junk stocks greatly outperform quality stocks often end with severe market corrections—provided the run was driven by investor mania rather than a bear market rebound.

Since 1957, the QMJ factor has seen eight downturns exceeding 10%. Of these, three were classic cases driven by technological innovation booms: the electronics and computer boom of the 1960s, the internet bubble of 1999, and the mania around electric vehicles, cryptocurrencies, and remote work in 2020.

In the two years following each of these bubbles bursting, quality stocks outperformed junk stocks by 28%, 68%, and 41%, respectively; overall stock market performance over those respective periods was -4.5%, -23.5%, and +6.4% (the last figure being positive only because the baseline was the COVID crash low).

In contrast, there are "benign" cases where junk stocks outperform after a major bear market—when central banks provide massive liquidity and nearly bankrupt weak companies rebound sharply from lows. Data from the 1970s, 1992, 2002, and 2009 fit this pattern.

The current cycle is clearly not one of those. The S&P 500 has hit record highs during this period, and the junk stock super run is powered entirely by the AI boom rather than cheap valuations or a bear market rebound.

A Style Shift Underway: Quality Stocks Making a Strong Comeback

Signals of a market style shift have already emerged—and are arriving swiftly.

In July this year, the QMJ factor jumped by 14.3% in a single month, its largest monthly gain since 1957. The Goldman-tracked basket of money-losing tech stocks dropped 11% in the third quarter, while previously high-flying speculative stocks were hit hard: AST SpaceMobile (ASTS) plunged 56%, and D-Wave Quantum (QBTS) fell 52%.

Meanwhile, high-quality consumer stocks staged strong rebounds. Since June 30, Procter & Gamble (PG) surged 12.9% and is on track for its best monthly performance since October 1998; Coca-Cola (KO) rose 17.3%; Church & Dwight (CHD) advanced 12.4%; Colgate-Palmolive (CL) was up 6.2%. Over the same period, the S&P 500 rose just 2.3%.

Stansberry points out that historically, the second and third largest single-month gains in QMJ occurred in November 2000 and October 2008, both right before major bear markets. This historical comparison makes the current market signals even more concerning. For investors, tilting toward high-quality, highly profitable companies may be the more prudent choice in the current environment.